Efficiency of the foreign currency options market

This paper provides a new test of the efficiency of the currency option markets for four major currencies — British Pound, Euro, Swiss Frank and Japanese Yen vis-à-vis the U.S. dollar. The approach is to simulate trading strategies to see if the well-accepted no-arbitrage condition of put–call parity (PCP) holds in a trading environment. Augmented Dickey–Fuller and Philips–Perron tests are used to check for the presence of unit roots in the data, followed by a formal econometric analysis. The results indicate that the most currency option prices do not violate the PCP conditions, when transaction costs are allowed for.     

Speculative attacks to currency target zones: A market microstructure approach

This paper develops a simple optimization model to characterize the behaviour of market participants during currency attacks and tests it empirically. Specifically, we test for the determinants of the timing, magnitude and chance of success of an attack. The empirical part is carried out using Mexican data, as this market provides us with an appropriate target zone framework and with a very rich dataset. We find empirical support for a set of microeconomic determinants which include: daily order flow, inventory management, intra-day price volatility, and the forward intervention-price differential. Finally, we test for the role of central bank reserves in speculative attack dynamics.     

Borrowing in foreign currency: Austrian households as carry traders

Household borrowing in a foreign currency is a widespread phenomenon in Austria. Thirteen percent of Austrian households report their housing loan to be denominated in foreign currency, mostly Swiss franc. Yet, despite its importance, peculiar character, and acute policy concerns, we know little about the attitudes and characteristics of the households involved in this type of carry trade. We analyze a uniquely detailed financial wealth survey of 2556 Austrian households to sketch a comprehensive profile of the attitudes and characteristics of the households involved. We employ both univariate tests and multivariate multinomial logit models. The survey data suggest that risk seeking, affluent, and married households are more likely to take a housing loan in a foreign currency. Financially literate or high-income households are more likely to take a housing loan in general. These findings partially assuage policy concerns about household default risk on foreign-currency housing loans or household retirement security.     

Convertibility risk: the precautionary demand for foreign currency in a crisis

This paper presents theoretical work linking money demand to the perceptions of households about the risk that domestic currency may become inconvertible or that it may be devalued. An empirical investigation of the size of this effect is carried out using monthly data for Korea to estimate an augmented demand-for-money equation. It is found that the fear of inconvertibility arising from the 1997 Korean currency crisis may have caused broad money demand to fall by 4–5% points,equivalent to the loss of reserves of $6–7.5 billion (or about 30% of reserves as measured at end-November 1997). This is a revised version of IMF Working paper WP/2001/210; it was written while Professor Black was Senior Policy Advisor at the IMF Institute and Christofides and Mourmouras were staff members in the IMF’s Policy Development and Review Department. The views expressed are those of the authors and should not be attributed to the IMF, its Executive Board, or its management. For useful comments and suggestions we thank an anonymous referee, Tim Lane, Ydahlia Metzgen, Roberto Perelli, Tony Richards, Christian Mulder, Steve Russell, as well as seminar participants at the IMF Institute, the IMF’s Asia and Pacific Department, Federal Reserve Board, and Bank of Indonesia. We would also like to note similar (unpublished) empirical results using our approach by Dr. Rino Effendi for Indonesia and Angana Banerji for Russia     

Put-call parity revisited: intradaily tests in the foreign currency options market

We test exchange-traded (PHLX) German mark options for conformance to put-call parity (PCP). Puts and calls are matched to the nearest minute, and the relative impact of competing spot exchange rate sources (Reuters vs. Telerate) is assessed. We find that PCP usually holds (roughly 96% of put-call pairs), with the exception of a notable incident in the European options pits. In those instances in which PCP is violated, we find sharp intradaily and intraweekly seasonalities for American options, with disproportionate PCP violations occurring during the relatively light trading periods in early evening and on Fridays. We also conclude that the Telerate prices as recorded by the PHLX are not as accurate as the Reuters exchange rates provided by Olsen and Associates, probably because of time lags in the Telerate data.     

Evidence of risk premiums in foreign currency futures markets

Weekly data for foreign currency futures prices are examinedfor evidence of risk premium. Covariance risks are measuredwith respect to the excess returns from benchmark portfoliosfor consumption and wealth. When the parameters representingthe prices of the covariance risks are held constant, no riskpremiums are detected. However, when these prices are allowedto vary with the conditional expected returns and variancesof the benchmark portfolios, possibly reflecting changing investmentopportunities, strong evidence of risk premiums is obtained.     

Why do Japanese giant trading companies prefer foreign currency to Japanese yen?: A supplementary note

This note extends the Chen and Chiang (1992) analysis to examine the possibility that trades may be denominated in the currency of the third country. Two main conclusions are found in this note. First, the quantities of trade and employment are still invariant to invoicing strategies chosen. Second, the currency of the trading partner may not be chosen by the monopolistic trader.     

Reducing reporting risk: Designating foreign currency forward contracts as cash flow hedges

We present an example that compares the effects on earnings of designating a foreign currency forward contract as either a cash-flow or fair-value hedge of a foreign currency denominated receivable. Entities engaging in exchange transactions not denominated in their functional currency frequently enter into foreign currency forward contracts in order to mitigate their foreign exchange rate risk exposure. The aggregate effect on earnings of the transaction gain or loss on the foreign currency receivable and the gain or loss on the forward contract is known on the date the forward contract is initiated. The effect on each period’s earnings during the term of a forward contract designated as a cash-flow hedge is also known on the date the contract is initiated; whereas the effect on each periods’ earnings from a fair-value hedge cannot be determined until the respective balance sheet dates. Therefore, designating forward contracts as cash-flow hedges may suppress volatility in reported earnings compared to designating forward contracts as fair-value hedges. In addition, the reporting risk (the amount of uncertainty surrounding the pending measure of an item to be reported in the financial statements) is lower when a forward contract is designated as a cash-flow hedge relative to designating it as a fair-value hedge. This suggests foreign currency forward contracts designated as cash-flow hedges are more consistent with the purpose of hedge accounting: to mitigate the effects on earnings of applying different measurement criteria for the hedge and the hedged item.     

International portfolio diversification: an ICAPM approach with currency risk

This article investigates international stock market integration in four major developed economies, namely the United States, the Economic and Monetary Union of the European Union, Japan and the United Kingdom, and two Asian emerging, countries namely China and India, over the period from June 1994 to June 2009. To model stock market integration we estimate a dynamic version of the international capital asset pricing model (CAPM) in the absence of purchasing power parity. Conditional variance is modelled via a multivariate GARCH specification. To investigate the evolution of integration overtime we estimate the CAPM in sub-periods. In addition, we connect our results to the timing of world financial crises. Our findings show that the stock markets tend to move in parallel after June of 2002, although from 2002 to 2006 there have not been crises events. These results support the increasing globalization and interdependence of both emerging and developed markets in the recent decade, reducing the benefits of portfolio diversification.     

Households’ foreign currency borrowing in Central and Eastern Europe

Foreign currency loans represent an important feature of recent financial developments in CEECs. This might pose a serious challenge for macroeconomic stability. Against this background, we study the determinants of foreign currency loans of households, using data on the behavior of households in nine CEECs. Our results reveal that foreign currency loans are driven by households’ lack of trust in the stability of the local currency and in domestic financial institutions. Moreover, special factors including remittances and expectations of euro adoption play an important role in selected regions. The financial crisis reduced foreign currency borrowing, but there is some indication this effect might be only temporary.     

探索支持个人本外币兑换特许业务的发展路径

个人本外币兑换特许业务自2008年试点以来,尤其在2012年国家外汇管理局对特许业务的管理办法进行修订以来,业务量和机构家数增长迅速。但与国际货币兑换公司相比,国内仍存在业务量较低、对银行的依赖较大、业务范围较窄等问题。文章回顾了该业务在我国的发展现状,借鉴成熟国际特许机构的发展经验,对促进我国特许业务发展提出相关政策建议。     

Trading activities and price discovery in foreign currency futures markets

This study investigates the relation between trading activities and the price discovery efficacy of the futures markets for EUR–USD and JPY–USD. According to data pertaining to weekly positions, collected from the Commitments of Traders reports distributed by the Commodity Futures Trading Commission, the information share of currency futures markets declines with hedgers’ positions but increases with speculators’ positions. In addition, both hedgers’ expected and unexpected positions have negative impacts on the contribution of the futures market; the futures market’s information share relates positively to speculators’ expected positions but is uncorrelated with speculators’ unexpected positions.     

The use of foreign currency derivatives and firm market value

This article examines the use of foreign currency derivatives(FCDs) in a sample of 720 large U.S. nonfinancial firms between1990 and 1995 and its potential impact on firm value. UsingTobin's Q as a proxy for firm value, we find a positive relationbetween firm value and the use of FCDs. The hedging premiumis statistically and economically significant for firms withexposure to exchange rates and is on average 4.87% of firm value.We also find some evidence consistent with the hypothesis thathedging causes an increase in firm value.     

外卡收单动态货币转换的技术实现

外卡收单动态货币转换(DCC,Dynamic Currency Conversion)是外卡收单业务的新领域,其功能是境外银行卡持卡人在中国消费时可用外卡账户的币种(而非人民币)进行结算.     

Arbitrage tests of the efficiency of the foreign currency options market

In this paper the lower boundary, excercise price, and put-call parity conditions for foreign currency options are subjected to empirical testing. The tests are directed towards the examination of the hypothesis that the foreign currency option market is efficient. The evidence in the ex-post tests is inconsistent with this hypothesis since a large number of violations of theoretical conditions are found in the data.     

Exchange rate exposure, foreign involvement and currency hedging of firms: some Swedish evidence

This paper investigates the effect of exchange rate fluctuation on a firm's value, the so-called exchange rate exposure, for a sample of Swedish firms. In contrast to previous results, using U.S. data, the values of Swedish firms, as reflected in the stock price, seem quite sensitive to movements in the exchange rate. Studying the cross sectional differences in exposure, the estimated exposure is positively and significantly related to the fractional of total sales made abroad and negatively related to the use of currency derivatives.
F30, G10     

Taxation of foreign multinationals: A sequential bargaining approach to tax holidays

Tax holidays for foreign multinational firms are tax concessions or straight subsidies granted for a limited period after entry. Such phenomena occur widely. We apply a sequential bargaining framework to a problem of ex post bilateral monopoly characterized by the presence of a host-country government and a foreign multinational firm. We show formally how a tax holiday can arise due to irreversible outlays and outside options.     

The effect of foreign currency hedging on the probability of financial distress

This paper investigates the effect of foreign currency hedging with derivatives on the probability of financial distress. I use Merton’s (1974) structural default model to compute firms’ distance to default as a proxy for their probability of financial distress. Using an instrumental variables approach to control for endogenous hedging and leverage, I find that the extent of foreign currency hedging is associated with a lower probability of financial distress. Whereas previous research finds that the probability of financial distress is a determinant of a firm’s hedging policy, this paper provides direct evidence supporting the hypothesis that the extent of hedging reduces a firm’s probability of financial distress.     

外币票据交换和清算平台的构建设想

随着我国金融改革的深入推进，特别是我国加入WTO过渡期之后，国内金融业正加快融人国际金融市场的步伐。在此新形势下，人民银行大力建设人民币支付清算平台，大额和小额的实时支付系统的相继运行和推广，标志着“建立统一、高效、安全的支付清算系统”的目标已基本实现。2007年上半年实现的全国票据影像交换系统，又使支付清算体系得到进一步完善。然而，与人民币支付清算体系相比，国内外币支付清算体系仍存在着诸多不健全、不完善之处。因此，建设统一、安全、高效、畅通的外汇清算系统，已成为当前金融业迫切的需要。